Hidden gems and borrowers with dirty little secrets: Investment in soft information, borrower self-selection and competition

Reint Gropp, Christian Gruendl and Andre Guettler

No 19, SAFE Working Paper Series from Leibniz Institute for Financial Research SAFE

Abstract: This paper empirically examines the role of soft information in the competitive interaction between relationship and transaction banks. Soft information can be interpreted as a private signal about the quality of a firm that is observable to a relationship bank, but not to a transaction bank. We show that borrowers self-select to relationship banks depending on whether their privately observed soft information is positive or negative. Competition affects the investment in learning the private signal from firms by relationship banks and transaction banks asymmetrically. Relationship banks invest more; transaction banks invest less in soft information, exacerbating the selection effect. Finally, we show that firms where soft information was important in the lending decision were no more likely to default compared to firms where only financial information was used.

Keywords: soft information; discretionary lending; relationship lending; competition (search for similar items in EconPapers)
JEL-codes: G21 G28 G32 (search for similar items in EconPapers)
Date: 2013
New Economics Papers: this item is included in nep-cfn and nep-cta
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (6)

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https://www.econstor.eu/bitstream/10419/88723/1/775708623.pdf (application/pdf)

Related works:
Journal Article: Hidden gems and borrowers with dirty little secrets: Investment in soft information, borrower self-selection and competition (2018)
Working Paper: Hidden gems and borrowers with dirty little secrets: investment in soft information, borrower self-selection and competition (2013)
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:safewp:19

DOI: 10.2139/ssrn.2287866

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